Guideline for inspection of equipment

The approval of Capital Expenditure (CAPEX) required to buy or build brand new equipment is today very difficult given the challenging market conditions we find ourselves operating in. Low margins and even lower utilisation of equipment mean that the return on investment may not meet the required criteria in a sub-$70/bbl environment.

Buying equipment on a second-hand basis can offer huge opportunity to the buyer however this usually comes with some degree of risk. Mitigating this risk is key to a successful outcome and involves understanding the exact condition of the equipment versus the planned use. The inspection of potential equipment therefore becomes a critical activity for any buyer and without it, a detailed evaluation of the risk and in turn the investment cannot be developed.

That said, depending on the level of complexity of equipment involved and the potential level of investment, relying on photographs or simply performing a visual inspection is unlikely to be sufficient to mitigate the risk involved. And therefore irrespective of whether a potential deal is based on an “as-is, where-is” arrangement or on something more complex where warranties are involved, engaging with a professional auditor or surveyor at an early stage of any transaction is almost certainly a small commitment to make given the upside of gaining a full understanding of the equipment involved.

Once the requirement to inspect or audit has been confirmed, it should take into account several key areas of interest, the only question being, to what level of detail is required. Such key areas may include:

  • The general condition of the equipment;
  • The quality and extent of documentation being provided with the equipment, more specifically;
    • Equipment certification (if required);
    • The original manufacturers documentation, e.g. operating & maintenance manuals;
    • The quality of maintenance records, i.e. has the equipment been maintained correctly.
  • What level of spares is offered with the equipment;
  • Is the equipment supportable: does the original manufacturer still exist or is there an alternative;
  • Does the equipment require to be modified or upgraded. If so, to what extent (timing, complexity and cost);
  • Will the equipment require to be transported and if so, what are the requirements and likely costs;
  • Are there implications to future insurance coverage.

Once the audit has been undertaken, a report detailing the findings will be produced and recommendations made. These may typically include:

  • Inventory of equipment including spares;
  • Inspection report detailing overall condition and/or status of the equipment, documentation and operating history;
  • Summary of certification status;
  • Evaluation of future operating risks;
  • Recommendations arising which may include:
    • Testing and/or trials to confirm equipment status (these may be operational, electrical, mechanical, hydraulic , etc);
    • Actions required to bring documentation to an acceptable level;
    • Engaging with certification bodies to confirm or reinstate the required certification;
    • Generation of a risk analysis and subsequent mitigation report.

In summary, such an approach will go a long way to ensuring no unreasonable surprises for the buyer whilst providing a realistic quantifying of risk associated with the acquisition of equipment which is not brand new and being delivered from the original manufacturer.

Finally, it is worth noting that such an approach can have equal benefit to the seller of equipment as it almost certainly aids the sale process, helps with pricing and, in the case where warranties may be issued, helps quantify the sellers obligation(s) post-transaction.